Moody's, S&P Dole Out Global Downgrades - Time to Go Gold?

Gold rose again on Thursday, briefly rising above $950/oz and was up 0.6% on the day. Determined selling on the open in Asia saw gold fall and profit taking has seen gold fall in Asia and in early trading in London. This is to be expected as gold had risen by more than 15% in less than a month.

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US, UK Credit Ratings Look Set to Be Downgraded

The credit rating agency Moody's has said that the UK and US credit ratings were being "tested". In a novel and somewhat bizarre departure, Moody's has split various "AAA" sovereign countries into three categories based on their strength in weathering the economic storm, denoting Ireland and Spain as the weakest, with the UK and US somewhere in the middle and Germany, France, Canada and the Scandinavian nations at the top.

This will in time be seen as gimmickry. Standard and Poor's have already downgraded Spain to AA+ and did not create sub grades within the credit rating system.

Some have criticized Moody's for being "unfair" to Ireland, Spain, the UK and US and have argued that these agencies previously gave almost everybody good ratings, and underestimated risks, but were now going to the other extreme.

This is errant nonsense and the unfortunate fact is that Moody's, the other credit rating agencies and the vested interests in the financial services industry continue to underestimate risks, as they have done for months and years.

Given the massive deterioration in the public finances and economies of these nations, by right they should be downgraded and unfortunately in the coming months they will inevitably be downgraded.

But Moody's and all the rating agencies realize that this would compound an already disastrous financial and economic crisis. Many pension funds internationally have mandates or investment guidelines to only invest in "AAA" rated government bonds and if these countries bonds were downgraded, they would be forced to sell those bonds en masse. This would likely see a crash in the already very overvalued government bond markets and see long term interest rates rise quickly and sharply.

The creditors of the US in Russia and China have rightly criticized the ratings agencies for their highly irresponsible practices in recent years and are increasingly nervous about their US denominated assets.

Ratings agency Standard and Poor's in January downgraded Spain's sovereign debt rating to "AA+" from "AAA" in January, citing insufficient means to deal with weak growth and a ballooning budget deficit. As they did the sovereign rating of New Zealand. The fiscal position in the UK and US is arguably much worse than in these two countries (Martin Wolf of the Financial Times recently said that major US banks, with their humongous Wall Street liabilities, are insolvent) and thus it seems inevitable that the UK and US will be downgraded in the coming months.

If the US is downgraded, then in effect the reserve currency of the world is being downgraded and this has huge implications for the international monetary system. Not surprisingly there have been op-ed pieces in the Financial Times and the Wall Street Journal calling for a return to some form of gold standard.

The governments of the world are nationalizing and socializing the meltdown in the shadow banking system and the international system with potentially disastrous consequences for us all.

Conditions are set to get markedly worse before they get better and the experience of Argentina and other previously wealthy South American countries may be instructive. The IMF is called in and there are structural adjustments, social services are affected or discontinued, banks nationalized, savings inaccessible, food and energy insecurity rise.

This is a potential reality for large western economies, especially if governments keep trying to inflate their way out of the current crisis. This is leading to massive currency debasement and will potentially lead to very significant stagflation and maybe even what could be called hyper stagflation.

Now more than ever, it is essential that individual savers and investors, companies, pension funds and sovereign wealth funds have an allocation to and directly own actual physical gold bullion. Paper exchange traded funds with all the attendant counter party, custodian, sub custodian, auditing and indemnification risk are speculative trading vehicles and not physical gold.

In these unprecedented economic times, it is irresponsible and extremely high risk not to have an allocation to gold bullion in an investment portfolio.

Disclosure: no positions

Comments

[yellowhoard:]

I've been looking into Canadian Banks as a safe haven. They are, for the most part, among the strongest in the world. With 7 to 8% dividend yields, they may be safer than US treasuries.

Feb 15 03:28 PM

[dcb:]

I've been thinking about the gold issue for a long time. I actually bought and traded out of the low on the same day, but that's another story (I'm new to the game). If I'm a country other than Euro, yen, or dollar I'd buy gold. when my currency stabilizes I go back to my old currency. therefore if the rest of the world has been buying gold while the dollar has been rising, I'd expect them to sell when the situation reverses. We don't have inflation now, so at this time I see more risks to buying gold as a dollar holder than not. I also get very suspect when everyone is talking about how something's going to rise and gold is now on everyone's lips. Lastly, my experience from listening to these investment banks is that they already have a position and want to push it higher past another resistance level so they can dump. I prefer to hold dollars, wait till a currency collapses then put some money there. I tried so hard to buy icelandic currrency but couldn't find a way and would have made a killing. youu almost always get good returns after a currency collapses if the government isn't totally incompetent.

Feb 15 03:36 PM

[User 334012:]

When you see only a shadow of a tail and a whisker,err
that it is a rat.I see a shadow related to gold-rat's in multiple's.

Feb 15 03:43 PM

[canary:]

Take a profit on gold now. It went up 15% in 3 weeks. There will be later chances to buy.

Feb 15 04:41 PM

[BxCapricorn:]

This is how it always happens. Everyone reads and believes the same thing at the same time, and pile into the same investment. The traders see the numbers and decide that since they make the market, it would behoove them to turn the trade the opposite way and crush the pack. I know, I know, gold is different than oil. Oil is down due to supply and demand issues. Gold has people clamoring for it, and therefore its demand is increasing as gold miners like FCX, ABX, etc. get clobbered and cut back production due to credit issues, further tightening supplies. Logic means nothing to the real market. After the last three years of bubble creation and implosion, you'd think that would be obvious by now. Remember how all of your gold bug journalists told you the dollar was dead or going to zero? Then the excuse was that hedge funds and CDS holders had to settle their deals in dollars, so demand went up for the dollar. Well it's freaking mid-February already! Wake up!

Feb 15 06:11 PM

[2banana:]

Which Canadian Banks do you like???


On Feb 15 03:28 PM yellowhoard wrote:

> I've been looking into Canadian Banks as a safe haven. They are,
> for the most part, among the strongest in the world. With 7 to 8%
> dividend yields, they may be safer than US treasuries.

Feb 15 07:19 PM

[SW Richmond:]

Interesting perspective on fallout from sovereign debt downgrades. Even more interesting mention of Argentina. Americans believe it can't happen here, and shortly they will be clogging up the comment space saying so.

There is too much debt. What happens when there is too much debt?

Either:
1. The debt will be restructured (default).
2. The debt will be repaid in inflated currency (default).
3. The debt will be repaid through a miraculous productivity increase.
4. The debt will be repudiated (default).

Did I miss anything?

Feb 15 07:36 PM

[VennData:]

Comical. When the US loses their credit rating, do your write up. in the mean time, short the US CDS all you want. You're going to get killed.

US losing their AAA rating... comical

Feb 15 08:35 PM

[12432:]

I would rather invest on silver !!
Cheaper than ever : gold/silver ratio and less production (70% comes as subproduct from zinc & other metals mining )

Feb 15 11:30 PM

[naidle:]

Is it just me or is silver a good bet to head back towards $17 an oz this year? It looks like it's lagging but coming on strong as the precious metal seems to do.

Just speculating of course but seems interesting.

Feb 15 11:56 PM

[scared rabbit:]

I realize the "masses are asses", but how do you protect your assets when you know inflation is coming?

Feb 16 09:01 AM

[ROLEX18:]

the more assets go up, the harder they crash and gold is not an exception, sell gold buy bank/insurance stocks.

Feb 16 12:10 PM

[yellowhoard:]

I like RY. Although I'm not sure that now is the time to invest. If the S&P sells below 740, I believe it will continue to 600. At 600 I will probably buy half of my position and then wait and see. I believe it is likely that the S&P will bottom at around 400. At that point I will fiill my position.


On Feb 15 07:19 PM 2banana wrote:

> Which Canadian Banks do you like???

Feb 16 12:13 PM

[auto44:]

These rating agencies did a great job with everyone else and were a big part of what got us into this mess.
(BNS) bank of nova sotia has gotten some good marks in Barrons this week.

Feb 16 02:09 PM

[FWallace:]

Did anybody get the chance to read/review January 2009 edition of National Geographic magazine? The highlighted heading is GOLD and the story is remarkable and astounding.

Please pick-up and read the article before buying another gold stock or the metal itself... very, very interesting and earth-moving.

Feb 16 02:43 PM

[fran:]

in the end, what is the significance of bond ratings[and their "agencies"]. the major parties capable to buy a nation"s debt[eg. China purchasing USA debt] know more about their own risk or strategic purposes than any rating "agency". the involvement of these "agencies" is irrelevant to the important geo-economic movers/shakers, lest these "agencies" would be party to or briefed on one on one meetings between majors.

that said, i do agree with your statements/questions on DEFAULT. the USA has been in quasi default for a long time. current actions reinforce this status, deeply. productivity growth seems to be a lost art/objective/directio... in the quiver of action. we can't be too productive if every enterprise/person is saved[allowed deserved failure]. why bother? it's antisocialistic.


On Feb 15 07:36 PM SW Richmond wrote:

> Interesting perspective on fallout from sovereign debt downgrades.
> Even more interesting mention of Argentina. Americans believe it
> can't happen here, and shortly they will be clogging up the comment
> space saying so.
>
> There is too much debt. What happens when there is too much debt?
>
>
> Either:
> 1. The debt will be restructured (default).
> 2. The debt will be repaid in inflated currency (default).
> 3. The debt will be repaid through a miraculous productivity increase.
>
> 4. The debt will be repudiated (default).
>
> Did I miss anything?

Feb 16 04:37 PM

[henarl:]

Moodys and S&P have no credibility any more - or at least they shouldn't have. Who rates the rateing agencies?

Feb 16 05:43 PM

[mr freddo:]

Timing is everything. Of course gold will drop...once Armageddon is off the table. Until then, I see investors piling into gold as an insurance policy for their portfolios. It doesn't hurt to have a month's supply of food either.

Feb 16 05:44 PM

[Dean M:]

Check out the bio: "Mark O'Byrne is a director of Gold and Silver Investments Limited, Ireland's wealth preservation experts". Wow Mark, thanks for sharing your unbiased view.

Feb 16 05:49 PM

[Allah:]

Hey Dean, Don't forget the immortal words of WC Fields, 'never smarten up a sucker"

Feb 16 09:37 PM